New Developments Abroad

May 22, 2008

The dollar has risen against most currencies but remains below levels at this time yesterday across the board. Since late in Wed N.Y. trading, the greenback shows gains of 0.3% against the yen and Swissy, 0.2% against the Aussie dollar and euro, and 0.1% versus the Canadian dollar.

The kiwi jumped 1.0% in reaction to a very stimulative FY08/09 New Zealand budget that is expected to delay any rate reduction there. The U.S. dollar also fell 0.3% against sterling and by another 0.2% relative to the yuan.

The Nikkei and Ftse rose by 0.4% and 0.3%, but most other bourses are lower. Dax -0.4%. China -1.9%. Hong Kong -1.6%. South Korea -0.7%.

Ten-year JGB yields climbed 4.5 bps to 1.65% after hitting an intra-day peak of 1.69% in continuing very high volatility.

Oil touched $135.04/bbl. It is 1.3% higher than last night’s close and 4.0% more expensive than just 24 hours ago. Gold is steady at $928.70/oz and, relative to oil, looking under-priced.

Japan’s customs trade surplus of Y 485 bln was 46.3% lower than in April 2007 and below market expectations. Import prices rose 9.1%, while export prices fell by 5.4%.

Japanese stock and bond transactions generated a tiny Y 34 bln inflow last week after a Y 1027 bln net outflow in the week to May 10th. Japan’s all-industry index, a supply-side proxy for real GDP, rebounded 0.5% in March but still fell by 0.9% in 1Q08.

Industrial orders in Euroland fell 1.0% in March, worse than expected, and dropped 2.5% from March 2007. Orders growth slowed from +1.9% in 4Q to +0.2% in 1Q, pointing to mounting strains on the manufacturing sector related to the euro’s strength, global financial market turmoil, and weakening export markets in Britain and elsewhere.

French officials from the central bank to the Finance Ministry complained about recent dollar weakness. While the FOMC minutes did not talk about the dollar, Fisher’s dissent from the 25-bp rate cut on April 30th did warn about a counter-productive feedback loop in which easing monetary policy promotes dollar depreciation, which generates more commodity price inflation, which squeezes real discretionary household purchasing power and weakens growth.

British retail sales volumes fell in April by 0.2% for a second straight month, the first back-to-back drop since January 2006, but the decline was somewhat less than analysts expected. Also in Britain, the CBI industrial trends survey showed a greater-than-forecast rebound in orders to -10 in May, still a very weak level, combined with the highest expected inflation component since February 1995.

Italian retail sales fell 0.5% in March, their greatest decline since March, and dropped 1.0% y/y. Italy’s business lobby group also complained about the euro’s strength.

The Bank of Iceland announced no further increase in its weekly lending rate of 15.5%. Most analysts had looked for further tightening at this time to protect the krona and contain inflation.


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